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What is debt consolidation?

Debt consolidation is the process of merging multiple debts, including loans, credit cards and overdrafts, into a single loan – to help simplify repayments and reduce stress.

How does debt consolidation work?

If you have several debts with different financial institutions, it can be hard to know what the best path forward is. You may have:

  • credit cards

  • store cards
  • overdrafts
  • personal loans

It can be difficult to decide where and when to make repayments, as each debt may have a different interest rate and repayment frequency. For example, if you have two credit cards, a store card and a personal loan, you could be making four repayments every month. One of these may have a higher interest rate than the others. 

A debt consolidation loan can merge these debts together into one loan to lower your monthly payments. It gives you a single interest rate, one recurring repayment as well as a clear loan term.

Things to consider before taking a debt consolidation loan

Will you end up paying more overall?

While a debt consolidation loan may reduce the amount of stress and effort of managing multiple debts, it’s important to check how it will impact your total repayment amount.

Even if the interest rate on a new loan is lower than any current debts you have, if the new loan has a longer term, you may still end up paying more interest than you’re currently paying. 

The amount you borrow, loan term and interest rate will determine how much interest you have to pay over time. You can use our loan repayment calculator to estimate how much this could be. 

You’ll need to look at how much your ‘total amount payable’ will be if you continue with your current repayments so you can compare the two options.

Are there early repayment fees on your current debt?

When you consolidate your debt, the money you owe on other loans, for example, will be paid off. It’s worth checking the terms and conditions on your existing debt, as you may be charged an early repayment fee. If so, it’s important to factor this into your calculations.

Can you afford the new debt consolidation loan payments?

It’s important that you can meet the new loan payments – to avoid going into further debt and making a difficult situation worse. Creating a budget can help you see how much money you have available and what you can comfortably afford to pay each month.

How debt consolidation loans affect your credit score

When you apply for a debt consolidation loan – or any type of credit – the lender will carry out a hard credit check, which leaves a visible footprint on your credit report. This can negatively affect your credit score.

However, as you start to pay off debt, your credit score is likely to improve over time – as long as you meet the repayments and avoid taking on more debt.

Explore: How to improve your credit score

We’re here to help

Consolidating debt can provide an opportunity to cut your spending and get back on track. However, if you’re regularly using credit to pay for everyday essentials, this could be a sign that you’re in financial difficulty – and a debt consolidation loan may not be the best solution. 

If you need a bit of help getting your finances back on track, HSBC has trained specialists you can speak with.